Profit and loss vs balance sheet
The difference between the two - explained
Your accounts include two main reports. Understanding the difference helps you read your financial position correctly.
The profit and loss account
The profit and loss account (P&L) shows your income and expenses over a period of time, usually a month, quarter, or year. The bottom line is your net profit or loss. This forms the basis for what Corporation Tax is calculated on. In Xero, find it under ‘Reports’, then ‘Profit and Loss’.
The balance sheet
The balance sheet shows what the company owns (assets), what it owes (liabilities), and what is left for the owners (equity) at a single point in time. Assets - liabilities = equity. Retained earnings are part of equity. In Xero, find it under ‘Reports’, then ‘Balance Sheet’.
💡 Good to know: The P&L tells you whether the business is making money. The balance sheet tells you the financial strength of the business. Both are needed to understand the full picture.
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